Target-Date Funds Explained: The Set-It-and-Rebalance Retirement Fund
A target-date fund is an investment fund that holds a mix of stock, bond and other funds, designed to make long-term investing more convenient by diversifying your money and changing the mix over time, according to the SEC's Investor.gov.
What does the year in the name mean?
The year is the target date, usually the year you expect to retire. A fund called something like Lifecycle 2060 is designed for people planning to retire around 2060.
How does the glide path work?
Target-date funds are typically funds of funds. The manager gradually shifts the mix from heavier stock exposure (higher risk, higher potential return) toward bonds (generally lower risk) as the target date nears. That schedule is called the glide path. Investor.gov notes there are two types: funds with a "to" glide path stop shifting at the target date, while "through" glide paths keep adjusting past it.
What should you check before investing?
Even funds with the same target date can differ a lot: different investment strategies, different glide paths, and different fees, sometimes charged by both the target-date fund and its underlying funds. Investor.gov also stresses that these funds do not guarantee any level of retirement income. Read the prospectus, check the glide path and the fees, and make sure the target year actually fits your situation rather than picking by date alone.
Frequently asked questions
Can I hold other funds alongside a target-date fund? You can, but Investor.gov suggests reviewing your overall asset allocation first, since the fund is designed to be a complete portfolio by itself.
Are target-date funds only for 401(k)s? No. They can be held in 401(k)s, IRAs, college savings accounts and regular brokerage accounts.
Sources and further reading: Investor.gov, "Target Date Funds - Investor Bulletin" (https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/target-date-funds-investor-bulletin).